Rystad Energy: oil update 17 September 2024

"The bulls are back in town as oil prices rise, shaking off weeks of declines. Supply disruptions are making their mark, including Hurricane Francine’s impact on US Gulf of Mexico infrastructure. Libya’s enduring central bank stalemate is keeping its export volumes low, and an imminent resolution to negotiations seems unlikely. Expectations of a US Federal Reserve rate cut are gaining momentum, which could be good news for demand. But the outlook in China is increasingly bleak, with the Asian powerhouse unlikely to hit its economic growth targets this year. Even though the outlook appears grim, China’s role as a major demand driver is far from over.”

Brent crude oil futures rose above US$73/bbl on Monday 16 September, due to US Gulf of Mexico oil supply disruptions and expectations of an interest rate cut by the Federal Reserve Bank. Prices are also supported by Libya’s low oil exports, which are caused by disagreements over control of the central bank. UN-led talks to end the stalemate have stalled.

Still, concerns linger over slowing global demand growth, particularly as Chinese data revealed the longest industrial slowdown since 2021, casting doubt on the country's ability to achieve its 5% growth target.

While the markets await the Fed's decision this week, supply concerns are intensifying in the background. Markets are finely poised, and any geopolitical escalation, unplanned maintenance, project delays or weather-related events could shock the system. Existing supply disruptions are offsetting lingering demand growth concerns to some extent, but their influence is not fully reflected on prices yet.

On the macroeconomic front, the US consumer price index slipped to its lowest level since February 2021, hitting 2.5% for August, down from 2.9% the month before. US August producer prices rose by 0.2%. As inflation moves toward the Fed’s target rate of 2%, the central bank looks poised to start gradually cutting its benchmark lending rates in its Federal Open Markets Committee (FOMC) meeting scheduled this week.

Bearish sentiment surrounding Chinese oil demand growth remains a key factor contributing to the pressure on global oil prices. The weakness is primarily due to the country’s economic challenges and the rapid pace of the energy transition, with electric vehicles and trucks powered by LNG continuing to pressure gasoline and diesel consumption. In particular, diesel demand has been weak, dragging down refinery runs since February.

However, the current bearish outlook may be exaggerated, as lower oil prices could reduce LNG's competitiveness and support demand recovery. Additionally, refinery runs are set to increase with upcoming restarts, and recovery efforts following recent typhoons are expected to lift diesel consumption in affected areas.

Although gasoline arbitrage has improved, diesel exports will likely decline due to more robust domestic demand. The market awaits further potential government stimulus to spur economic growth and consumer confidence. Despite ongoing concerns over weak demand, global liquids and crude balances are expected to remain tight through the end of 2024, with stock draws anticipated.

On crude, supply is notably constrained, with the year-over-year change in crude and condensate supply expected to turn negative for the first time since 2020. Global crude oil supply is expected to decline by 220 000 barrels bpd y/y in 2024, primarily due to extended OPEC+ cuts, reduced Libyan output and weaker performance from non-OPEC+ producers. OPEC+ members, including Saudi Arabia and Russia, are maintaining voluntary cuts of 2.2 million bpd until November 2024, with the potential for further extensions. US oil supply growth has been revised down to 280 000 bpd, reflecting a decline in Bakken output and modest Permian growth. Libyan production has dropped sharply due to political disruptions, while Brazil’s output is projected to recover in the second half of the year, and Nigeria’s production outlook is improving with steady growth.

Additionally, our preliminary estimate indicates Hurricane Francine might result in a 1.8 million bbl production loss in the Gulf of Mexico over two-and-a-half days.

This week, the main focus is on the Federal Reserve. While there is speculation over a possible 50-basis-point cut, some experts caution that such a move could signal panic, recalling past recessions that followed similar cuts in 2001 and 2007. A 25-basis-point reduction is currently the more favoured option, but markets are closely monitoring the Fed's final decision. Additionally, Eurozone inflation data will be released on 18 September. Following the ECB's recent rate cut to 3.5%, the market is baking in an inflation rate of 2.2% year over year in August, down from 2.9%.

Read the article online at: https://www.worldpipelines.com/special-reports/19092024/rystad-energy-oil-update-17092024/